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When to Change Financial Reporting Systems

When is it appropriate to cutover reporting systems immediately upon closing and when does it make more sense to wait?

The Merger Verger was asked this question in an email from a friend who is the head of the Americas for a global logistics company headquartered in Europe. This company and this individual have both had fairly deep deal experience so the fact that the question still arises suggests that the answer is not a simple one.

One the one hand, prevailing deal logic says to integrate most business elements as quickly as possible. Cutting over to new financial reporting systems clearly gives the acquirer more immediate control. It also makes a statement about urgency, old ways of doing things and other issues that may need visible reinforcement.

However, retaining an existing system for a period of time may also be useful. As my friend states, keeping an old system theoretically “allows the acquisition target to continue to look at their financials in the manner they are accustomed to so as not to lose focus on the results during the critical post-merger period.” Excellent point.

The issue here is monitoring financial performance and, to a lesser extent, not having the demands of a new system distract from the performance of the very business that system was intended to measure.

A couple of thoughts occur:

In deciding whether to retain temporarily an old reporting system at a target, there had better be pretty compelling evidence that the change could be so potentially disruptive as to be counterproductive. Do not cave to mere whining.

Likewise, there had better be a clear date for the eventual transition to the buyer’s normal practices. Postponing so critical an element of integration leaves a flavor of “business as usual” at the target. If there are operational challenges that require close attention, a sense of business-as-usual is decidedly one that you want to avoid.

Is the decision to postpone cutover aimed at preventing the finance team from being temporarily over burdened or at ensuring that the key performance indicators (KPIs) that are produced each month follow the target’s old system so that its managers can continue to understand and monitor performance effectively?

If the latter is the case, could the target’s historical results be recast to reflect (or closely approximate) the buyer’s reporting practices so that relevant KPIs could be derived for pre-acquisition periods in order to track future performance against them. This can be complex or expensive undertaking obviously but it could be better than postponing cutover.

Could there be some reason why the buyer would want to revise or refocus the target’s historical KPIs? If so, an immediate change might make the most sense: get on with the new because both the old numbers and the old measures don’t cut it under the new regime.

There will be pain in any merger. As a general rule delaying it does not lessen it. Usually, the contrary.

Questions:

What are those special circumstances that would lead a company to postpone a cutover of reporting practices in order to ensure focus on operational matters and better tracking of ongoing KPIs?

Has anyone had experience with postponing a cutover? How did it work? Did it accomplish the objectives?

Are there “half-way” measures that can allow the immediate cutover yet permit better KPI tracking at the target than might occur under an entirely new reporting system?